Cut rates to avoid 'damaging' jobs: Westpac

An RBA rate cut will be essential to avoid spiralling unemployment, an economist has claimed.

Following last week's ABS figures indicating a rise in unemployment to 5.3%, Westpac chief economist Bill Evans has argued the Reserve Bank will need to cut interest rates to stave off a "damaging rise in the unemployment rate".

Evans said the RBA should cut rates quickly to give the labour market time to respond, and prevent "an unnecessarily high unemployment rate".

"The RBA will be aware that the unemployment rate continues to rise long after the first rate cut in the cycle," Evans commented.

While the RBA has pointed to the mining boom as an indicator that Australia will face a tight labour market in the coming years, Evans said last week's figures show the demand for labour is not filtering through the economy. He referred to RBA figures showing that construction activities in the mining sector only contributed to a 0.25% rise in employment over the last year.

"Furthermore, the income effect which was so important in the previous mining boom has not been apparent in this cycle as government, households and firms have been saving any income boost," he said.

Evans expressed concern over the RBA's future moves, and said the RBA's tone could indicate they were ignoring current economic indicators.

"Our biggest concern is that the authorities, as implied in the Governor's statement, dismiss short-term economic weakness and continue to emphasise medium-term concerns about tight labour markets and a wealth-creating mining bonanza," Evans said.